Dan O’Brien
Ten years on from the bursting of the property bubble and the start of the crisis of western finance, Dan O’Brien assesses what has really changed
BY the summer of 2007 it was increasingly clear that the Irish property frenzy was not going to end with a soft landing. The big question was how hard the landing would be. Then, exactly a decade ago, came the first rumblings of the international financial crisis, which was to erupt explosively 13 months later with the collapse of Lehman Brothers. By the time that happened, the Irish economy was already deep in recession.
One of the great imponderables will always be how Ireland would have fared had Lehmans been saved and an international recession avoided. Had the world remained ‘normal’, the Irish crash might have been shallower, thanks to stronger exports and less financial panic. On the other hand, more normal interest rates over the past decade would have made servicing debts — private and public — a lot more costly. Frankfurt’s unprecedentedly low interest rates came at just the right time for an Irish economy which was, and remains, highly leveraged.
Putting aside the imponderables, consider what we know. Let’s start with the positives. However deep and painful the crash was, most of the gains in incomes and wealth achieved over the previous decade were retained. Ireland is no longer a laggard in material terms compared with its peers in north-western Europe. The dozen or so years of Celtic Tiger catchup growth, after decades of underperformance, have transformed the country permanently, and for the better.
Jobs numbers illustrate this nicely. When the first post-independence census was taken in 1926 there were 1.2 million people working. In the mid-1990s the number was much the same. Those 70 years of employment stagnation were followed by a dozen years of explosively transformative jobs growth. In a little over a decade, employment almost doubled, to just shy of 2.2 million by the turn of 2007.
The latest figures show there are still 100,000 fewer people at work than at the peak. Given that the population has increased substantially, there is even more of a distance to travel before we return to peak employment rates (the share of the adult population at work). That said, over the past five years of strong jobs growth, the Irish economy has shown that the employment boom of the Celtic Tiger period was not a one-off. We have — happily — not returned to the long stagnation that characterised most of Ireland’s post-independence history.
The economy is also structurally in much better shape today than it was a decade ago. Having regained competitiveness, albeit in the most brutal way possible, Ireland’s economy is more internationally focused. Both Irish and foreign companies are exporting more than ever before. Considerably less activity is generated by the domestic construction and property sectors — 143,000 people were at work in the sector at the most recent count, almost half the peak level.
Nor has the ongoing recovery been accompanied by a return to bubble-era craziness. Private debt continues to fall and the latest residential property figures, published just last week, show that nationwide prices in June were 28pc lower than at their peak in April 2007. While there are issues around affordability in the rental sector in some areas, the main driver of prices and rents now is more people, not more credit, as it was a decade ago. This makes the current situation much more sustainable — people do not suddenly disappear as credit can when banks blow up.
Many of the economic changes of the past decade have been the result of individuals and businesses adapting, changing and taking new opportunities. That said, markets don’t function in a vacuum. The political and policy frameworks count for a lot too. With the economy expanding uninterrupted for five years, the choices made and imposed in the previous five years appear to have been broadly correct. Those who argued with such certitude that “you can never cut your way out a recession” have been proved very wrong.
Perhaps the biggest question arising out of the crash, which was only the latest case of policy-induced disaster, is whether enough has been learnt to prevent another huge unforced error. In other words, is another 1950s, 1980s or property crash in store in the years and decades to come?
The evidence to date is not encouraging. Five years into a strong recovery and the Government still has not balanced its books. At this point in the economic cycle, a responsible government would be solidly in surplus and paying down the debt accumulated during the bad times. Not only has that not happened, it hasn’t happened despite huge windfall gains from unexpected corporation tax revenues and billions in savings on servicing the national debt courtesy of Frankfurt’s money-printing.
Having stimulated the economy when it has been growing strongly of its own accord, there will be little in the Government’s tank if stimulus is needed in coming years. As such, the promises of politicians to end their long-standing ‘pro-cyclical’ ways — of amplifying the good times with stimulus and the bad times with cuts and new taxes — are mostly empty. No party, in government or in opposition, has advocated a ‘counter-cyclical’ budgetary stance which would allow the wherewithal for stimulus when the next downturn comes.
If the macro-management picture is depressing, so too is the one that emerges of another major function of government — the prioritising of the national interest over sectoral ones. There has been no real change on the part of the political class to stand up to interest groups. The legal profession managed to stymie modernising reforms despite the pressures of the troika while banks have been allowed to deal with their still huge portfolio of non-performing loans at their own pace.
It has been much the same with public sector interest groups. A big chunk of the hike in government spending in recent years has gone on more public sector pay despite most measures showing most groups doing very nicely compared with the private sector or counterparts internationally. The commission assembled to make recommendations on pay increases for public servants produced an unimpressive and thinly-argued report earlier this year to justify a pre-ordained pay hike.
Arguably, voters in a democracy get the politicians they deserve. The political outcomes described above, in part at least, reflect public opinion. Public discourse still centres on spending more as a means of fixing every problem — housing today, education tomorrow, health always. There is an irrational loathing of the Universal Social Charge, a fair and broad-based tax on income that is hard to avoid. And the opposition that emerged to the sort of water charges that exist in every peer country points to a society that has plenty of growing up to do.
Real political reform could have changed the system so parties faced greater incentives to show leadership over followership. But that has not happened. An electoral system that disincentivises elected representatives from focusing on the national and the international will never generate the kind of alertness and pro-activity that a small open economy in a fast-changing world needs if it is to avoid crashes. There was no significant push to change the voting system during the crisis and it is hard to see it being changed now, despite its rising costs.
The fragmentation of the vote, including the proliferation of independents (a unique feature of Irish democracy), has made coalition formation and cohesion harder. ‘New politics’ is, to a considerable extent, the politics of the lowest common denominator. There is little sign that significant defragmentation is taking place and, as this column has argued before, the splintering of the vote since the crash is likely to reflect a longer-term underlying change that was masked by the boom. An electoral system that generates perverse incentives for politicians and weak and unstable government is almost a recipe for future crises.
Partly offsetting this risk is the emergence of other actors which could constrain governments from doing stupid things. The Central Bank has become more independent and assertive. An Oireachtas budgetary oversight capacity is being established. The creation of the Fiscal Council has provided a valuable independent voice capable of calling the Government out on the sort of budgetary recklessness that has been far too common over the past 40 years.
But probably the biggest change that could prevent another act of national selfharm is the denationalisation of economic policy since the crisis. Much tighter rules on budgets and macroeconomic imbalances and the Europeanisation of banking regulation are very significant changes. While Brussels and Frankfurt have made plenty of mistakes since becoming more prominent, and there are real concerns about the political direction that both the European Commission and the ECB have taken, the agreed rules that they oversee offer the best chance there is of preventing the Irish system’s tendency to self-harm.
‘Real political reform could have changed the system’